For many people, owning real estate in Toronto represents the pinnacle of success and achievement. It’s easy to see why. With such a perfect blend of city excitement, unprecedented opportunities, and natural scenic beauty, who could ask for anything more? The schools are top-notch, the waterfront is breathtaking, and there’s a bustle of activity that spans every neighbourhood in the city.
Unfortunately, as Toronto’s population keeps growing, so does the cost of housing, which puts the dream of homeownership out of the realm of possibility for all but the very affluent. However, with a little research and out-of-the-box thinking, you can find creative solutions to break into Toronto’s highly sought-after real estate market. One option you might want to explore is fractional ownership.
Your First Mini-Step Onto the Property Ladder
If anyone in your circle of family or friends is real estate savvy, you may have heard the term “the property ladder.” If you own even a tiny condo anywhere in the world, you have conquered the first step of the ladder. As you get established, and your equity grows, you have the option of moving higher and higher up the rungs of the ladder. At the very top, you have real estate investors who own multiple properties at once.
If you are renting, you’re not on the property ladder at all. As housing values rise and mortgage stress tests become more stringent, breaking the rent cycle and achieving home ownership becomes more and more inaccessible. Even the first step of the ladder can seem like an impossible hurdle. However, fractional ownership gives you the option of taking a mini-step, which at least is a move in the right direction.
Searching for even more tips to break into the real estate market? Check out some of our related posts:
- Purchasing Your First Condo: 5 Things To Know
- Has Buying a Home in Toronto Gotten Easier?
- How the Government is Helping First-Time Buyers
Fractional Ownership Defined
Traditional homeowners often joke about co-owning their homes with the bank. In a sense, this is true in that the bank can repossess the property if they default on their payments. However, the house is 100% in their name, and whoever’s name is on the title is the one who will benefit from any long-term equity gains. Alternatively, it’s also the homeowner who takes the hit when property values fall. The bank will always get its share!
Just as the name implies, fractional ownership means that you own one small percentage of the property. You may have also heard it referred to as a “rent to own” program. In some ways, it’s similar to time share programs and REITS, except you live in the home permanently as your primary residence. Though not a perfect system by any means, fractional ownership can allow aspiring buyers the chance to own property in Toronto far sooner than by following the traditional route.
How Traditional Real Estate Works in Toronto
As property prices soar in Toronto, so does the amount of down payment required. If a house is priced at $1 million or more, you need 20% right out of the gate, which works out to at least $200,000.
If the price is less than $1 million, you need just 5% of the first $500,000 and 10% on any amount over and above. In other words, the down payment on a $800,000 home would be $55,000 ($25,000 + $30,000.) That’s a little better than $200,000, but is still out of reach for many trying to etch out their first step onto the property ladder. Add rising interest rates to the mix, and homeownership can feel further away than ever.
Fractional Ownership Provides An Alternative Path
Fractional ownership puts the dream of homeownership back on the table, with far less needed upfront and monthly maintenance costs that are also more affordable. Here’s an example of the contrast between what you need for a traditional versus a fractional purchase.
Imagine that you are interested in a condo priced at $600,000. You plan on purchasing an equity stake of 2.5%, meaning you need $15,000 to get started. Once you have your foot in the door, options will open up to you down the road.
You now share in all of the benefits and risks of homeownership, just on a much smaller scale. Your rent covers your share of the monthly maintenance, mortgage costs, and property taxes while you live in the home as your primary residence.
You can also choose to pay an equity boost to increase your ownership stake. Unlike renting, where the money is gone forever, fractional ownership allows you to build equity. If you decide to leave the home five years later, you can cash out your portion of any gains in the property value.
The Challenges of Fractional Ownership
By all appearances, fractional ownership seems perfect for anyone who would otherwise struggle to buy a house in Toronto. It is a viable alternative if you are self-employed and struggling to qualify for a mortgage or fall short on a down payment. However, like any significant purchase, there are some challenges and potential risks to be aware of.
- As with any investment, the market can be volatile, especially in the short term. Fractional ownership usually offers more financial benefits the longer you hold onto the property.
- As a partial owner, you will have to run any decisions about upgrades through all other partners.
- Though you can increase your equity share in the property with each monthly payment, you may not be able to purchase the home outright.
- In a tight housing market, opportunities to buy into the right home can be few and far between and available properties can get snapped up quickly.
Fractional ownership can also be a great way to get your foot in the door as a real estate investor. Speaking of investing, here are some resources you may find helpful:
- How to Determine A Good Investment Property
- Should You Invest In An Income Property Now?
- From Homeowner to Investor: The Easiest Way to Break into Toronto’s Market
Is Fractional Ownership Better Than Renting?
As property values in Toronto rise, so does the cost of renting. Landlords are eager to not just cover their expenses, but most also want to earn a healthy profit over and above their overhead. As a result, it can actually be less expensive to buy than it is to rent. Fractional ownership can help you get into the market and start growing your equity and financial stability sooner than you may have thought possible.
Do you want to explore this exciting possibility even further? We are happy to guide you and answer any questions you have. Reach out today at erica@ericareddy.com or call 416.443.0300 for more information.
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